They're Betting Millions on $10 Natty Gas

Natural gas may be plunging to seven-year lows, but one fund is betting heavy that the commodity will rebound by more than 200% over the next six months. And we're looking to profit right along with them.

But there's a catch. . . You must be patient and bet smart.

Right now, gas demand is so weak and supply is so great that some believe we could run out of storage capacity before the winter heating season even starts. That alone would require gas companies to cut back on flow from wells or shut down production, which would push prices back up.

Plus, the glut could eventually and easily turn into a deficit ― which would happen more quickly if and when the economy begins to recover. Any recovery would quickly eat through inventories, simultaneously catapulting natural gas prices.

And there's even hope that a cold winter will spur strong demand.

And while it may not set the stage for an immediate rise to $10, we could easily see $7 to $8, as we head into the winter months.

It's part of the reason why one fund spent millions buying up January and February 2010 call options. . . and why we're safely and cautiously following their lead.

But like we said, patience is required.

We could still see further price deterioration, as companies with high debt and interest payments fail to cut production. In Q2 2009, for example, companies like Chesapeake Energy (CHK) used higher production efforts to beat Street earnings expectations.

Even the Gas Companies are Bullish

When you review as many company earnings reports and forecast estimates as we do, you pick up on the sentiment of the business community, which is bullish in the case of natural gas.

Here's what EOG Resources (EOG) had to say, for example:

"Our view of the North American gas and oil markets is consistent with our previous earnings call, except that we've become more bullish regarding 2010 and 2011 gas prices. . . we expect the gas market to turn sometime early in 2010 almost regardless of what happens to LNG imports."

Even Obama Could be a Nat Gas Boon

The Obama Administration will see some type of environmental legislation aimed against carbon and its role in the theory of global warming. So over the next few months, we'd expect to see either a "Cap and Trade" or carbon tax (the price of which can eventually be passed to the consumer), which some in the industrial world are pushing for.

And for natural gas, either is attractive. . . since it's much cleaner than both oil and coal. So if we see a carbon tax passed this year, natural gas would immediately become even more competitive and expensive than it is now.

While the current situation requires patience, it's a value investor's dream come true.

Some companies will make a killing from the collapse in natural gas prices. . . others will just fade away into oblivion. But you only need to buy into the bigger-named stronger companies, like Chesapeake and Petroquest (PQ), to take advantage of the eventual recovery.

Just like a value investor, identify the beaten-down bargains and hold on until the rest of the market catches up to your way of thinking. . . which they'll eventually do in time. If you thought $4 natural gas was a bargain, $3 or slightly below is an absolute steal.

Our near-term forecast pegs natural gas at $5. . . but remember, you must be patient and bet smart in this market. Natural gas will not recover overnight. . . but it will pay off.